Recently the insurance regulator has suggested that Indian insurers should look overseas and expand their international footprints. This is time now when our homegrown insurers should look at overseas countries both in terms of acquisitions and opening branches there.
It is observed that if foreign players could join hands with Indian insurers, the domestic insurers should also look at foreign countries in order to expand their business. The domestic insurers might face capital constraints to acquire companies abroad. But now the government has considered raising FDI limit in the insurance sector to 49 percent from the existing 26 percent.
As per the current regulation, a foreign player cannot have more than 26 percent stake in an insurance company in India. Many foreign players in recent months have either exited the Indian operation or are mulling to do so. US-based New York Life recently left the India insurance business after 10 years of association with Max India. Tata AIG Life Insurance has also been rechristened as Tata AIA Life Insurance Company following the exit of American International Group (AIG) from the Hong Kong-based AIA Group.
ING is contemplating shutting shops in a few Asian markets, but India is not under that plan. Indian insurers may run short of capital to acquire companies in other countries. At a time when the government is giving a push to reforms in the insurance industry by raising foreign direct investment limit to 49% ,there is an example of German insurance giant Allianz, which gets 60% of its business from outside Germany.
Indian entrepreneurs while investing abroad may face various commercial and political risks. The commercial risks may arise due to insolvency of the buyer; failure of the buyer to make the payment due within the specified period;Â or buyer’s failure to accept the goods, subject to the given conditions.
While, the political risks may be due to imposition of restrictions by the Government of the buyer’s country or any Government action which may block or delay the transfer of payment made by the buyer; war, civil war, revolution or civil disturbances in the buyer’s country.
Other unforeseen incidents like new import restrictions or cancellation of a valid import license in the buyer’s country; interruption or diversion of voyage outside India resulting in payment of additional freight or insurance charges which cannot be recovered from the buyer; and any other cause of loss occurring outside India not normally insured by general insurers.
Hence, in order to ensure safe and successful overseas expansion plans it is necessary to provide a comprehensive insurance cover against all such risks faced by an entrepreneur. Such an insurance facility seeks to create a favorable climate in which investors including exporters can get timely and liberal credit facilities from banks at home.
Why nris should buy life insurance from india:
Indians have spread to virtually every corner of the globe and have made their mark in the chosen line of business or profession. As an Indian living abroad, it definitely makes good financial sense to connect with the roots of your lineage and make wise investments back at home, especially when the country is in a developing phase.
It is prudent to take calibrated financial decisions, especially at a time when uncertain economic conditions are prevailing in the more developed countries. It is also imperative to provide for long term security and achieve financial goals for you and your dependents. India is one of the fastest growing economies in the world and various economic estimates and research reports peg India’s growth around 6 to 7 per cent annually.
This is significantly higher as compared to other economies in the developed world where there is either nominal or no growth. This makes India an attractive investment destination for nonresident Indians. Also, given the prevailing interest rate regime in India, an NRI will earn a lot more on his bank deposits in India as compared to his country of residence. This also makes a compelling argument for the NRI to park his money in bank deposits in India. An NRI has various options to choose from when he/she is structuring his financial plan.
There is no one-size-fits-all investment strategy that can be prescribed for an NRI as such and an ideal financial plan should have an optimum mix of various asset classes. However, the role of insurance as an asset class for an NRI in meeting his and his family’s financial goals is important. Life insurance products can help to address an array of financial needs and goals of an NRI as they can be customized for specific purposes.
Opportunities for overseas Indians:
Overseas Indians are amongst the most successful communities in the world. The overseas Indian’s community estimated at over 25 million is spread throughout the globe. They have made profound contributions in the Indian economy through their knowledge and innovation. The majority includes Non-Resident Indians (NRIs), Overseas Corporate Bodies (OCBs) and Persons of Indian Origin (PIOs). They help in rapid developments and contributes towards the growth of Indian economy.
They are an indispensable source of foreign direct investments into the country. India has the second largest Diaspora in the world after China. The expanse of overseas Indian community covers 110 countries. India enjoys the status of being the highest remittances receiver in the world. In India, the Ministry of Overseas Indian Affairs (MOIA) is the main organization established at the central level for the overseas Indians.
It helps in establishing Indian Diaspora networks plus ensures benefits of the Indian Diaspora from the developments in India. The ministry has also established Overseas Indian Facilitation Center (OIFC) for investment and business associated activities. Every year it sponsors ‘Parvasi Bhartiya Divas’Â (Non-resident India day); with the motive of promotion of Overseas Indians.
At the State and union territories level special NRI cells are established for the welfare of overseas Indians, along with Department of Industries or Udyog Bandhu or Udyog Mitra. Being the fourth largest economy in the world in terms of PPP (Purchasing power parity), India is the most preferred destination for Foreign Direct Investments. The laws governing foreign exchange in India are the Foreign Exchange Act (FEMA), 1999 and Foreign Direct Investment (FDI) Policy.
Legal standing of insurers:
Doing business abroad and growing internationally is an essential part of a company’s business expansion policy. It is governed by a company’s aim to diversify its commercial activities across national frontiers and increase its competitiveness.
Hence, planning of manufacturing facilities, logistical systems, financial flows and marketing policies in such corporations are done by taking into consideration the entire world as a single market. Any business transaction that involves persons or firms of more than one country is described as overseas business. In India economic reforms opened up important avenues for promoting global business by Indian entrepreneurs.
The first policy governing overseas direct investment was in the form of guidelines issued in 1969. These guidelines defined the extent of participation of Indian companies in projects abroad and were subsequently revised and liberalised from time to time. They aim at providing transparency in the framework of overseas investments.
The most important legislation was the Foreign Exchange Management Act (FEMA) which changed the entire perspective on foreign exchange particularly those relating to investment abroad. It changed the emphasis from exchange regulation to exchange management.
Indian companies can directly invest outside India by way of contribution to the capital or subscription to the Memorandum of Association of a foreign entity, signifying a long term interest in the overseas entity. It involves setting up a Joint Venture (JV) or a Wholly Owned Subsidiary (WOS) abroad. Under the guidelines, all applications for grant of approval for setting up joint ventures/wholly owned subsidiaries are to be made and processed by the Reserve Bank of India.
In order to make their investments abroad, Indian companies need funds to meet their various capital requirements; to make equity participation in overseas ventures as well as to acquire foreign companies or businesses.
Safe & successful overseas expansion plans:
Indian entrepreneurs while investing abroad may face various commercial and political risks. To ensure safe and successful overseas expansion plans, it is necessary to provide them a comprehensive insurance cover against all such risks. Accordingly, Export Credit Guaranty Corporation of India Limited (ECGC was established by the Government of India under the administrative control of the Ministry of Commerce & Industry which provides all such insurance facilities to them.
Also, the Government of India has, so far, signed BIPAs with 68 countries out of which 53 BIPAs have already come into force and the remaining agreements are in the process of being enforced. In addition, agreements have also been finalised and/ or negotiated with a number of other countries. Besides, an important legislation called as ‘the Arbitration and Conciliation Act, 1996’ provides a statutory provision for settlement of all commercial disputes of an enterprise without having recourse to the court of law.
In India, the relief against the problem of double taxation faced by an entrepreneur while expanding business abroad has also been provided through schemes of bilateral and unilateral relief. Over 65 companies are raising equity on the London Stock Exchange. And there are companies in the commercial debt markets; banks are lending to Indian projects.
There is a huge amount of Indian work in London. Sectors such as insurance, shipping and maritime and foreign exchange are maintaining their position. The number of people employed has decreased a bit, but not significantly. The strong world view of London will continue.
LIC in international business:
The Life Insurance Corporation of India transacts business abroad and has branch offices in Fiji, Mauritius and United Kingdom. LIC also operates in overseas Insurance Market through Joint Venture Companies namely Life Insurance Corporation (International) B S C (C), registered in Manama (Bahrain), Kenindia Assurance Company Ltd., registered in Nairobi, Life Insurance Corporation (Nepal) Ltd. registered in Kathmandu, Life Insurance Corporation (Lanka) Ltd. registered in Colombo and Saudi Indian Company for Co-operative Insurance registered in Riyadh.
An offshore company, Life Insurance Corporation (Mauritius) Offshore Ltd. registered in Port Louis, Mauritius is a Joint Venture Company between LIC of India and GIC of India. This company defers its life business activities and contemplates to pursue non-life reinsurance business with active participation of GIC. A Representative Office has been established recently in Singapore to study the Regulatory Issues and to assess the market potential in order to find an appropriate mode of entry into Singapore insurance market.
Among the above, Kenindia Assurance Co. Ltd., Nairobi, Kenya & Saudi Insurance Company for Co-operative Insurance, Riyadh, Kingdom of Saudi Arabia are composite companies transacting life and non-life business.
General insurers abroad:
The General Insurance Corporation ( GIC Re) has its presence in foreign reinsurance business through branch office in Dubai and London and representative office in Moscow. Apart from reinsurance business, GIC continues to participate in the share capital of Kenindia Assurance Company Ltd. (Kenya), India International Insurance Pvt.Ltd., Singapore and LIC (Mauritius) Offshore Ltd., a joint venture company promoted by LIC of India in Mauritius.
The New India Assurance Co. Ltd. is the largest General insurance Company of India on the basis of gross premium collection inclusive of foreign operations. In respect of the number of offices abroad and the premium earned from foreign operations, the company is way ahead of other general insurance companies in India.
Overseas operations commenced in 1920. Operations in 20 countries in the year 2011-12 Network of 9 Branches, 7 Agencies, 1 Associate companies and 3 Subsidiary companies in the year 2011-12. Overseas Premium of New India was Rs. 1531.37 crores in the year 2011-12. The Insurance Regulatory and Development Authority, recently circulated draft guidelines to allow all categories of insurers that have completed 10 years of operations in India to set up insurance joint venture companies, subsidiaries or branches overseas.
The foreign partners in the joint venture firms will not be allowed to set up branches in India. In what could be the first step towards the globalization of Indian insurers, the sector regulator is planning to allow domestic insurance companies and reinsurers to establish overseas joint venture firms and subsidiaries by buying stake in foreign insurers.
Guidelines for entrepreneurs:
The policy for regulating overseas investments by Indian entrepreneurs and all other related aspects like finance and insurance is governed by the circulars and guidelines issued by the Reserve Bank of India from time to time. Guidelines and circulars are defined as the documents notified by the Reserve Bank for the purpose of clarifying and interpreting the various provisions of a law or regulation.
For example, FEMA is an umbrella Act regulating all foreign exchange transactions including investments abroad. It is under this Act that the Reserve Bank of India is authorized to issue various circulars, guidelines, rules and notifications, etc. for managing the various aspects of capital outflows. One of the most important guidelines relating to doing business abroad is the ” Guidelines for Indian direct investment in Joint Ventures and Wholly Owned Subsidiaries abroad.” These circulars and guidelines are broadly aimed to ensure:-
- A transparent policy framework in order to enable Indian businessmen to plan their business and to be able to react to potential collaborators outside the country. Such transparency is also required to enable the financial institutions and banks to assess their support through professional judgement in the context of financial sector reforms.
- A formal recognition of the changing global reality which include:- close relationship between flow of investment and trade; success in the domestic economy as a precursor to success in the international arena; the importance of continuously updating the technology through cross investments; more dynamic relation between market seeking and resource seeking investments; tendency for skill and service intensity rather than material intensity in the international flows.
- Capturing of Indian realities which include:- strengthening globalisation of Indian economy by allowing the Indian entrepreneurship to go global; being a capital importing country, the need to avoid large capital outflows; visualising the global economic relationship well beyond physical exports and ensuring that Indian industry and business attain strategic positions in certain areas or regional blocs.
Risks of doing business abroad:
Any time a business decides to expand internationally, it faces certain risks in dealing with the local culture, language, business practices and government regulations. Before expanding, any company should first consider and study all of these factors to determine if the decision to move abroad is the right one.
Business transactions are not conducted in an identical manner in every, and in some places the way business is conducted may even seem strange. These culture differences may interfere with the way business associates work and communicate with each other.
As an example, in India a potential associate may be nodding his head from side to side, which to an American may appear to be a negative gesture, but in India it is a gesture of understanding. Most often these conflicts are most noticeable among cultures that are unable to understand one another and have completely different traditions and thought processes. However, when personnel are trained to be aware of these differences, business relationships can be enhanced.
A key element in making international operations successful is finding new approaches and creative solutions to cultural differences by combining both cultural perspectives. Language is another barrier that causes conflicts to businesses wanting to expand internationally. Given this reality, businesses should contract services of excellent translators so that language failures do no cause business transaction failures.
Conflict and business problems can also occur when trying to get appropriate business licenses, permits or when buying business real estate. Laws are different in other countries, and being unfamiliar with them can cause a business to unintentionally break the law and have to pay high fines and penalties. Thorough research into business and accounting legalities in the country are required. Hiring a foreign accountant and reliable business attorney are often standard practices in getting the business setup as it should be in the foreign country.
No licence required by foreign insurers:
The Division Bench of the Delhi High Court has, in a judgment of far-reaching consequences in the Insurance Sector, recently held that a foreign insurance company can sell its insurance, through an agent or otherwise, in India without requiring to be registered or obtaining a licence / permission from the Insurance Regulatory Development Authority (IRDA) so long as the insurance covers risks incurred outside India.
The Division Bench reversed both the orders of the Single Judge and that of the IRDA order which had earlier held that such foreign insurance companies need to compulsorily be registered with the IRDA.
The Government of Ukraine and Belarus, with the object of rendering medical aid to foreign citizens, made it obligatory for foreigners visiting the respective countries temporarily to have medical insurance. Ukrinmededstrakh, an Ukranian company, and Belgosstrakh, the Belarusian State Insurance Organisation, were granted exclusive licence by their respective countries for providing such obligatory medical insurance to foreigners temporarily staying in their respective countries. M/s Radiant Overseas Pvt Ltd (Radiant), an Indian company, entered into separate agreements with Ukrinmedstrakh and Belgosstrakh where under Radiant was authorized to sell the authorized medical insurance policy of the said countries to Indians intending to visit the two countries and collect insurance premiums from intending visitors.
Radiant, after getting permission from the Reserve Bank of India (RBI) and Ministry of Finance, Govt. of India, was issuing certificates for emergency medical aid to the intending visitors to Ukraine and Belarus and the premium so collected was remitted to the Government of Ukraine and Belarus respectively. Meanwhile, IRDA – the statutory regulatory authority in the Insurance sector in India – passed an order dated 30 April 2010 restraining Radiant from selling insurance policies, collecting money towards insurance premium or carrying on any activity related to and connected with the business of insurance.
It held Radiant ought to have obtained a permission or licence from IRDA, as mandated under proviso to Section 2C read with Section 3 of the Insurance Act, 1938 thereby authorizing such person to carry on insurance business or to function as an agent or a broker of an insurance company in India.
Radiant challenged the said order of the IRDA before the Delhi High Court (Single Judge) on the ground that the certificate of medi-claim being issued by Radiant had no effect on the territory of India and was active only in the territory of Ukraine or Belarus; that the provisions of Insurance Regulatory and Development Authority Act, 1999 were not applicable to foreign insurance companies and that the activity undertaken by the appellant was not governed by the IRDA Act as it pertained to selling of foreign insurance for risks incurred outside India.
The Single Judge of the Delhi High Court dismissed the writ petition holding that the collection of premium and the delivery of the certificate in India by the petitioner (i.e. Radiant) amounted to carrying on the business of insurance in India.
It further held that the petitioner was carrying on insurance business in India on behalf of foreign insurance companies and that the petitioner could not claim that its business fell outside the purview of the Insurance Act and that it did not require licence from IRDA. Radiant appealed against the said order of dismissal of the Single Judge before the Division Bench of the Delhi High Court presided by the Acting Chief Justice. The key issues for consideration before the Division Bench were:
- Whether insurance laws of India have extra-territorial application?
- Whether laws and regulations governing Insurance business in India can govern the business of insurance outside India and if not, can it govern the business of buying in India of such foreign insurance?
- Whether provisions of the Insurance Act and IRDA Act were applicable to foreign insurance companies and would mere selling of insurance (to cover risks incurred outside India) in India amount to doing ‘insurance business in India’?
- Whether an Indian company acting in India, as an agent of the foreign insurance company to sell insurance for risks incurred outside India, is engaged in the business of insurance in India and is therefore required to carry a valid license / registration from IRDA?
The Division Bench, after detailed discussion on the law and legislative intent of the insurance legislations in India, held that there is no extra-territorial operation to insurance laws of India. It further observed that the business of foreign insurance companies of covering risks incurred outside India cannot be said to be insurance business in India (within the meaning of Insurance Act), even if the premium for such insurance is paid in / from India and insurance policy is issued India.
The essence of the business / contract of insurance is the coverage of risk and if the policies issued by the foreign insurer do not cover the risk as long as the insurer remains in India, mere issuance thereof cannot be said to be carrying on insurance business in India. Accordingly, the Division Bench was of the view that there cannot be said to be an insurance business only in effecting a contract which is contingent and is to be operative and enforceable not in India but only outside India.
The court observed that without the contract being operative and enforceable in India, mere ministerial act of issuance of the contract in India cannot be said to be amounting to carrying on insurance business in India.
There are 27 life and 27 non-life insurers in India, many of these formed in partnerships with foreign insurers. Reliance General Insurance Co. Ltd is one of the few private non-life insurers without a foreign partner. Similarly Sahara India is working without a Joint Venture partner.
Till now, private insurers were barred from setting up overseas branches or acquiring stakes in foreign entities to set up joint venture businesses. Foreign insurers, however, can buy up to a 26% stake in an Indian insurance firm. The new regulations will allow Indian insurers to set up foreign insurance joint ventures by subscribing to the paid-up equity capital of such firms.
Indian insurers will also be able to form foreign subsidiaries by holding at least 50% of the paid-up equity capital or gaining control of the boards of such firms, and expand their networks through full-fledged branch offices abroad. The draft guidelines require Indian insurers to have adequate financial net worth before approaching the regulator to set up foreign ventures.
The minimum net worth has not been specified. Actual expansion will depend on jurisdictions of the countries where the Indian insurers want to set up joint venture firms. But there is a huge opportunity with the NRI (non-resident Indian) diaspora. The provision for Indian insurers to go global is mooted at a time when they are struggling to expand within India.
US-headquartered New York Life recently exited the India insurance business after its 10-year-long association with Max India. Tata AIG Life Insurance became Tata AIA Life Insurance Company following the exit of American International Group (AIG) from the Hong Kong-based insurer AIA Group. Tata AIG was set up in 2001 as a joint-venture between the Indian conglomerate Tata Group and AIG. Reports have also surfaced that Dutch major ING Insurance International is set to make an exit from Indian insurance industry.
The company holds 26 percent stake in ING Vysya Life Insurance Company. Many global insurance giants had exited the Indian operation mainly because of the structural problems in their respective domestic markets While life insurers are settling down with new models to adapt to new rules that came into effect from September 2010, non-life insurers are reeling under losses on account of huge claims in their motor and health insurance books. “Public sector companies have been doing it for a long time, and private companies can also set up shops now.
IRDA is currently circulating preliminary draft guidelines on what would be required of Indian insurance companies in order to allow them to open operations overseas. As the drafts circulate among domestic insurance companies, IRDA has asked for feedback from insurance companies before the end of 2012. Many of the preliminary guidelines appear to be aimed at ensuring that domestic Indian insurance companies seeking to commence overseas operations are on solid financial footing to do so, and that doing so would not pose risks to local business and policyholders.
As it stands now, domestic Indian insurance companies are not permitted to expand overseas, either through branch offices or investment in foreign firms, while foreign companies can currently own stakes in domestic insurers of up to 26 percent. The draft allows for insurance companies of any category to apply to the regulator for permission to open foreign businesses after the insurers have been in operation domestically for 10 years.
The proposed regulation would allow domestic insurers to start a foreign operation in a number of ways, either by opening branch offices, the formation of foreign subsidiaries by controlling the board or owning 50 percent of the paid-up equity capital, or by starting a foreign joint venture. While many insurance companies in India have joined with foreign insurers to make joint ventures, any company that a domestic Indian insurer engaged with overseas to create a joint venture outside of India would not be allowed to enter into the domestic Indian insurance market.
Although there is a drive to make certain that Indian companies wishing to start operations abroad will have the financial wherewithal to do so without putting domestic business at risk, there are no concrete financial guidelines at the moment, whether with regards to the minimum net worth necessary to apply to the regulator for authorization or the capital requirements for establishing joint-venture’s overseas.
However, the guidelines do mandate any losses incurred or capital requirements that must be met by foreign branches must be paid for by shareholder funds only, so as not to interfere with the policyholders’ funds in the domestic Indian business.
This could open a doorway to many opportunities for Indian insurance companies to globalize their business. In many places such as countries in the Middle East, there is a sizable Indian Diaspora which some insurers may already be considering tapping in to, however the opening of an office would also allow them to underwrite local business as well as expatriate Indians.
By: Jagendra kumar, Published in Life Insurance Today, November, 2012
